Term Sheet: WeWork’s bankruptcy; PCCP’s latest credit fund; New York’s Flatiron conversion

WeWork’s Chapter 11 bankruptcy filing will affect nearly $19 billion of outstanding commercial real estate debt; PCCP kicks off fundraising efforts for another real estate credit strategy to succeed its $1.7 billion predecessor; the office conversion wave gains more momentum with the planned redesign of New York’s iconic Flatiron Building; and more in today’s Term Sheet, exclusively for our valued subscribers.

They said it

“After two decades of [the same] leadership, maybe there are some things that need to change” 

Julie Donegan, real estate investment director at California State Teachers’ Retirement System, on her plans for the investor’s real estate business in affiliate title PERE’s November cover story.

What’s new

WeWork this week filed for Chapter 11 bankruptcy protection. (Source: Getty)

The WeWork Saga: Chapter 11

In a widely expected move, troubled New York-based office provider WeWork has filed for Chapter 11 bankruptcy protection in the US. The move was the start of what the company said is a comprehensive reorganization that will allow it to restructure $19 billion of existing debt – and survive its current distress. The move signals additional pain for landlords and lenders exposed to the company, particularly as WeWork said it would be “requesting the ability to reject the leases of certain locations.” Among the creditors listed in the filing with the largest unsecured claims against WeWork, several private real estate managers featured, including managers Kennedy WilsonBeacon Capital PartnersBrookfieldNuveen and CIM Group.

Extra credit

PCCP, a commercial real estate debt and equity manager based in Santa Monica, California, this week filed with the Securities and Exchange Commision for its latest credit-focused fund. While the filing did not disclose a targeted size for PCCP Credit XI, the firm raised around $1.7 billion for its previous credit vehicle, which closed in April 2022, offering an indication of its possible size.

Despite a slower fundraising environment, the fund is the third real estate credit-focused vehicle making its debut this month. Dallas-based manager Pender Capital is rolling out a targeted $1 billion closed-end interval fund and Miami-based manager Highline Real Estate Capital has debuted a planned $350 million offering, targeting residential distress in the Southeastern US. PCCP previously outlined plans to target more short-term refinancing opportunities in the absence of regional US banks.

Hold your horses

The planned office-to-multifamily conversion of New York’s Flatiron Building is expected to result in a fresh start for the storied property after a covid-19-induced period of distress and auction limbo. But local lenders and investors are not expecting to see a raft of similar adaptive reuse projects for older buildings in the city. One lender who spoke with REC USA noted that converting an iconic office property on Fifth Avenue and 23rd Street into apartments is a relatively easier business and logistical proposition compared to converting a mid-block office building into a similar use. Still, the White House is embracing office-to-residential and other conversions and has gone so far as issuing fresh guidelines to highlight additional financing available to make these projects work.

Real Estate Capital USA Awards 2023

Call for nominations

Real Estate Capital USA has opened nominations for its third annual awards for US-focused commercial real estate lenders, advisers and service providers. The awards seek to honor standout organizations and transactions across 30 categories, encompassing activity across the last 12 months. Access the submissions form here – the deadline for submissions is midnight EST on Friday, November 17. Voting will commence on Monday, December 4 and close on Friday, January 12, 2024. Winners will be announced online April 1 and be featured in our April-May 2024 edition. Last year’s winners can be seen here.


Constraints and rent cuts

Multifamily rent growth is struggling to match the sector’s previously outsized pace, according to analysis published this week by Richardson, Texas-based data and service provider RealPage. Jay Parsons, senior vice-president, chief economist and head of industry principals at RealPage, detailed the headwinds in a LinkedIn post this week, noting how rising debt costs and a significant supply of delivered apartments are putting pressure on developers to reach stabilization fast so they can refinance into permanent loans. To achieve that, Parsons said many developers are cutting market rent in addition to making concessions to narrow the rent gap between lease-ups and stabilized apartments. Market asking rents for apartments in lease-up have dropped 5.4 percent since peaking in August 2022, he said.

Credit capital raising

Fundraising efforts throughout 2023 are on track to log the lowest annual fundraising total since 2012, according to a report published this week by affiliate title PERE (registration required). Across both equity and debt funds, only $92.8 billion has been raised across 139 strategies between the first and third quarters of this year compared to the $150.4 billion raised over the same span in 2022. PIMCO, based in Newport Beach, California, recorded the only fund close of Q3 to enter PERE’s top 10 rankings across the entire year with the $3 billion PIMCO Commercial Real Estate Debt Fund II. Multifamily continued to surpass the industrial sector in terms of capital raised and number of funds closed for sector-specific strategies during the third quarter.

Data snapshot

The inverse of positive

A recent sell-off in the bond market has lifted the yield on the 10-year US Treasury to nearly 5 percent and dampened the growth expectations for the US commercial real estate market, per a report released this week by Dallas-based advisory CBRE. As a result, CBRE – which had been anticipating a 15 percent increase in investment volumes – is now expecting a 5 percent decline.

Borrower’s Corner

Shifting into neutral

Eagle Property Capital, a Miami-based manager focusing on the workforce housing market, is seeing more deals in its pipeline that it would be able to acquire on a leverage-neutral basis. The shift is significant as it follows a long period in which the firm only saw the potential to acquire properties with negative leverage, said Rodrigo Conesa, co-founder and managing partner, in a story posted on Real Estate Capital USA this week. “I would love to say that these acquisitions are leverage positive, but that is not possible because long-term rates are still high. But we are seeing leverage-neutral acquisition possibilities where we see value and upside, and I think that we can turn the neutral leverage into positive leverage within the next six to 12 months.”

Loan in focus

MF1 Capital originated a $101.2 million refinancing package for Akara Partners’ Kenect Nashville (Source: JLL)

Music city refinancing

MF1 Capital, a joint venture between Boston-based manager Berkshire Residential Investments and New York-based manager Limekiln Real Estate, this week originated a $101.2 million refinancing on a 420-unit, Class A apartment building in Nashville. JLL Capital Markets arranged the loan for Kenect Nashville on behalf of the sponsor, Chicago-based developer Akara Partners. The Music City property checked several boxes for MF1, most importantly its location in a live-work-play environment, noted Michael Squares, who led the effort at MF1.

Bigger picture, the transaction illustrates a continued tilt toward the multifamily sector. According to representative data from Real Estate Capital USA, multifamily loans made up about a third of the roughly $3.7 billion in financings tracked in October. The REC USA Lending Barometer, published every Tuesday, also tracked five additional multifamily loans originated by MF1 so far this year.

Today’s Term Sheet was prepared by Randy Plavajka with Samantha Rowan, Charlotte D’Souza and Shihao Feng contributing